Let us understand the amalgamation meaning with the help of an example.
Let us assume two companies operate in the manufacturing industry: ABC Ltd. and XYZ Ltd.
Due to tough competition in the manufacturing sector, both companies are facing a slowdown in the business, even though ABC Ltd. has a better market capitalisation. So, both companies decide to combine via the process of amalgamation. The new entity that is formed is named ABCXYZ Ltd.
This new entity has all the assets and liabilities of both companies, and ABC Ltd. and XYZ Ltd. cease to exist as legal entities.
How does Amalgamations work?
Amalgamation, a corporate restructuring strategy, involves the merging of two or more companies to form a single entity. Typically, this occurs when companies share similar business operations or can benefit from economies of scale. The process involves a larger company, the transferee, absorbing one or more smaller companies, the transferors.
The process of amalgamation begins with a formal proposal initiated by the boards of directors of the concerned companies. A comprehensive plan is prepared, detailing the merger’s objectives and mechanics, and submitted to regulatory authorities such as the High Court and the Securities and Exchange Board of India (SEBI) for approval. Once approved, the amalgamation moves into execution, where the weaker company (transferor) is absorbed by the stronger company (transferee). A new entity is then formed, consolidating the assets, liabilities, and operations of both organisations. To ensure fair treatment, shareholders of the transferor company are issued shares in the newly formed entity, subject to specific conditions outlined in the merger agreement. Following this, the transferor company undergoes liquidation, officially ceasing to exist, while the new organisation inherits and integrates all its resources, thereby creating a unified and potentially more competitive corporate structure.
Types of amalgamation
Here are different types of amalgamation:
- Amalgamation in the nature of merger: In this type of amalgamation, the stronger company (transferee) takes over the smaller or weaker company (transferor) by pooling all the assets and liabilities of both businesses. The shareholders of both companies can continue to hold their shares provided they meet the minimum requirements set by the new entity formed.
- Amalgamation in the nature of purchase: What if the shareholders in the companies amalgamating fail to meet the minimum requirements? This is when the amalgamation is done as a purchase by the stronger entity. Only the shareholders of the stronger company continue to hold stakes in the new company.
Features of Amalgamation
New Entity Formation:
In amalgamation, a new company is created.
In a merger, one company survives while the other is dissolved.
Asset and Liability Consolidation:
Continuity of Shareholders:
Regulatory Compliance:
Unified Management:
Reasons for amalgamation
The main reasons behind the amalgamation of companies include:
- Accessing new markets: As preferences and demands of the market change with time, new markets or new geographies open for exploration. However, due to a shortage of resources or other factors, businesses may not be able to explore them. Through amalgamation, two or more companies can fill the gaps and explore the new markets as a new entity.
- Cost reduction: When companies combine, they can use their assets, and thus, they may not have to build new assets, which they would have otherwise required to expand their business. This helps cut down costs and optimise profitability.
- Elimination of competition: Often, stronger companies try to take over weaker ones to reduce competition.
Advantages of amalgamations
- It helps the entities survive in the market when competition increases.
- It may help in reducing taxes by offering certain tax benefits.
- It helps in increasing the economy of scale.
- The stakeholder's value increases as the business expands and explores new horizons.
- Amalgamation helps in diversifying the business arenas.
Disadvantages of amalgamations
While there are many positives of the process, there are a few drawbacks too:
- It can create a monopolistic market as the competition reduces.
- It can lead to job cuts for the employees of the companies involved.
- It may also increase the debt of the newly formed entity.
What is the objective of Amalgamation?
Economies of Scale:
Market Expansion:
Diversification:
Reduction in Competition:
Cultural Synergy:
Methods of accounting for amalgamation
Two main methods of accounting are used for amalgamation.
- Pooling of interest: The transferee company records the assets, liabilities, and transferor company’s reserves at the existing carrying amounts. If both companies have distinct accounting policies, a uniform policy is set, and the same is adopted by the newly formed entity following the amalgamation process.
- Purchase method: In this method, the assets and liabilities are considered as per their fair values, and the transferee company can determine them. Also, the transferee can make changes and create provisions for different costs.
What is an amalgamation reserve in accounting
Any amount left after the amalgamation procedure is treated as amalgamation reserve only if it is positive. If it is negative, it is recorded as goodwill in the books of the new entity.
Amalgamation vs acquisition
Amalgamation and acquisition are different. However, sometimes, people use these words interchangeably by mistake.
As stated above, amalgamation leads to the formation of an entirely new legal entity, and the companies that amalgamate no longer exist after the process. On the other hand, in an acquisition, a company purchases another company by buying a significant portion of its stake, but no new entity is formed in this process.
Wrapping up
Amalgamation is common in the business sphere, especially when a company becomes weaker but has relevant assets to be used for growth and expansion. While this process helps businesses expand their horizons, it can lead to an undesirable, monopolistic economy.
